Alcatel-Lucent Loses Its Leadership

After two years of continued losses following its merger, Alcatel-Lucent is cutting its ties with the deal's architects.

Chairman Serge Tchuruk and CEO Pat Russo have announced that they will be leaving to make way for a new generation of leadership, in a move the company described as the conclusion of a "transitional phase" following Alcatel's 2006 purchase of the U.S. telecommunications equipment maker.

Yet the planned departures coincide with continuing indications that Alcatel-Lucent (NYSE: ALU) faces major challenges. The company, which has yet to turn a profit since the merger, posted second-quarter results hurt by a declining U.S. dollar and weakness in its carrier business.

"It's time for the company to move beyond focusing on the merger, and be able to develop its own identity and personality beyond that of the former Alcatel and the former Lucent," Russo said on a conference call with analysts.

Russo, the former chief at Lucent, took over as CEO of the joint company following the merger. She will leave her post as soon as a replacement is found, the company said, while Tchuruk will depart Oct. 1.

"I will continue to run the company just as I had been since the merger as I work with the board in identifying a new CEO for the company and ensure a smooth transition," Russo said during the call.

Alcatel-Lucent reported quarterly earnings of $6.5 billion U.S., a decline of 5.2 percent from the second quarter of 2007. The company also reported a net loss of $1.73 billion, of which $1.2 billion came as impairment on its CDMA (define) business.

Aside from the large writedown, the company's CDMA business dragged down overall results with lackluster performance in the carrier market. Russo said Alcatel-Lucent's carrier business revenues were down 3 percent compared to the previous year.

"This year-over-year decrease was primarily due to a decline in CDMA, resulting from a significant reduction in 'capital expenditures' by one of our big North American customers," Russo said. "While CDMA is facing challenges, we don't believe we've lost footprint in North America and we will continue to invest in the technology."

The U.S. economy, and in particular, the U.S. dollar, were also a significant drag on Alcatel-Lucent's results.

"We're now seeing some concern that the slowing U.S. economy is starting to spread to Europe," Russo said. "The dollar-euro exchange rate continues to be a factor that negatively impact our top line as a result of the fact that approximately half of our revenues are in U.S. dollars or dollar-linked
currencies."

Though Alcatel-Lucent is losing money and its top executives, Russo did point out that there are some bright spots in her company's performance.

She noted that that the company's services business had a strong quarter, growing at 16 percent year-over-year, fueled by networking integration and operations. The enterprise segment, meanwhile, grew at a 7 percent clip compared to last year, driven by strength in data networking and IP telephony sales.

"We've pleased with the progress we've made operationally in Q2," she said. "Our results came in overall in line with our expectations, though underneath we clearly had some puts and takes.

"We continue to operate in an overall macro-economic environment that does create some uncertainty and I think it's prudent for us to continue to be prudent."